Tenet Healthcare Corp (THC) 2005 Q2 法說會逐字稿

Good morning. And welcome to Tenet Healthcare's conference call for the quarter ending June 30th, 2005. Tenet is pleased that you have accepted their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. The call is also available to all investors on the web, both live and archived.

Tenet's management will be making forward-looking statements on this call. Those forward-looking statements are based on management's current expectations and certain risks and uncertainties may cause those forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in Tenet's filings with the Securities and Exchange Commission, including the Company's Form 10K and its quarterly reports on Form 10Q, to which you are referred. Management cautions you not to rely on, and makes no promises to update, any of the forward-looking statements.

Management will be referring to certain financial measures and statistics, including measures such as EBITDA and such are not calculated in accordance with generally accepted accounting principles or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance, but is providing these alternative measures as a supplement to aid in analysis of the company. Reconciliation between non-GAAP measures and related GAAP measures can be found in the press release issued this morning on the company's website. Detailed quarterly financial and operating data is available on First Call and on the following websites: Tenethealth.com businesswire.com and companyboardroom.com.

During the question/answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, operator. And good morning, everyone. I'm joined this morning by Reynold Jennings, Tenet's Chief Operating Officer, Bob Shapard, our CFO, and Peter Urbanowicz, our General Counsel. I also have on hand a number of other colleagues who are prepared to assist with Q&A. By the way we'd like to limit today's call to a hour, so our prepared remarks are shorter than usual.

The summary of the second quarter is that we continue to make solid progress on the most important issues that we face. We are hitting our objectives for cost efficiency and are making progress in pricing, and this bodes very well for our future performance. The primary challenge we face remains volume growth. We continue to put initiatives in place to drive growth in admissions and outpatient visits. We're taking the right steps with patients and payers, but we haven't yet seen the results of these actions in our volumes statistics. I believe that we are on the right track and I remain convinced that these initiatives will demonstrate results over time.

We've laid a strong foundation for future growth, first by eliminating structural barriers and clearing away distractions. For example, the hospitals that we divested represented structural barriers to success. We just could not have supported the capital investment that was required in those hospitals. We also could not have succeeded carrying all the burden of the patient litigation that we settled late last year and early this year. The one big structural barrier that remains is the cloud that still hangs over us from the remaining government investigations in litigation. We're working hard to resolve those issues but it may continue to take time.

Fortunately we've had more success in laying a foundation for growth through operational improvements in quality, pricing, cost control and compliance. For example, we've improved the contract structure, pricing, and relationships in the managed care segment of our business. We've carefully controlled the growth of some costs and have succeeded in reducing others. Our quality statistics are very solid and continuing to improve and our compliance program is highly effective.

But as I just said, the foundation that we've laid is incomplete without growth in volumes because it drives the operating leverage inherent in our industry. To be more specific on volumes, same hospital in-patient admissions declined by 1.4% relative to the second quarter of 2004. This decline is roughly the same as what we saw year-over-year in the first quarter. The bottom line impact from these volume declines was magnified because they came from the most profitable segment of our business. I'm referring to commercial managed care where volumes declined by 4.8% relative to last year's second quarter. That rate of decline was 7% in the first quarter of 2005 versus the same quarter last year. So at least we've slowed the rate of decline.

There are many issues that influence this, from uncertainty on the part of physicians about the Company, to tough negotiations that we've had with payers. I told you late last year and early this year that after freezing charges, and effectively prices, for two years we were moving towards more normal industry pricing increases. As part of this effort I've also told you how we needed to take some negotiations to the brink of termination and actual termination. Let me give you an example of how this can affect admissions.

Many elective procedures are scheduled three to four weeks in advance. Physicians who are alerted to the possibility of a contract interruption at a Tenet hospital will tend to reduce the risks to their patients and the insurance company refusing to pay their bills. As a result, these physicians often direct their patients to a non-Tenet hospital until the payment situation is resolved. This temporary redirection of business was one of the drivers of our volume declines this quarter in a number of markets, particularly in south Florida.

I'm pleased to say that we have now resolved virtually all outstanding legacy disputes with major payers, including those issues relating to 2002 and prior. Although we'll always have a certain amount of contract and collection tensions with managed care, our relationships with payers as a whole are now fairly normal. Having normal relationships is one of the many essential elements to our efforts to resume volume growth.

Turning to pricing, we continue to make excellent progress. In the piece of our business where pricing reflects the attractiveness of our hospitals, namely commercial managed care, the growth continues to improve. We've been achieving mid to high single digit percentage increases on newly negotiated contracts. In Q2, that translated into an actual increase over the entire commercial managed care portfolio of roughly 3.4%. However, due to adverse business mix shifts within managed care, away from commercial patients, towards managed Medicare and Medicaid patients this increase was diluted to a net increase of just 0.2% which we refer to as aggregate portfolio yield. This weakness in yield was driven primarily by the soft commercial managed care volumes. We believe we've made great progress in building pricing power in achieving typical industry rate increases, but the bottom line is that we have a volume problem. We don't have both a volume and a pricing problem.

It is very hard to overcome the effects of a 4.8% volume decline in commercial managed patients either in terms of overall volume statistics or pricing statistics or earnings. We've been challenged in growing our volumes, especially volumes in commercial managed care, which remains our most profitable customer segment. But we have been making excellent progress in fixing the pricing problems that we faced in recent years.

Turning from pricing to costs, our cost control initiatives have been successful during the past two years and this quarter was no exception. Year-over-year same hospital controllable operating expense was virtually flat on an equivalent patient day basis. This achievement extends the progress that we gained in the first quarter of this year when controllable operating expense grew by only 2.2%. The best results were in the other category where we achieved reductions in some items like stock compensation expense and malpractice expense, but these gains do not change the fundamental fact that we are doing a have he good job in controlling costs. Even on the two items I mentioned we have no reason to expect that we can't sustain the current lower levels of expense.

For the last 2.5 years I've continuously launched initiatives to further improve our quality and efficiency. One of the reasons that you see so much noise in our quarterly numbers and comparisons is that we have changed fundamental things like divesting 40% of the hospitals we owned, radically changing the way that we billed the uninsured, we've instituted rigorous standards for qualifying inpatient admissions versus observation stays and we've also exited entire business lines such as home health. These issues will work their way through our financial comparisons as we pass the anniversary of the actions, much as comparison of the results with and without outlier payments are no longer relevant.

One of our current initiatives is to examine our service lines in each of our hospitals. Those service lines with low market shares, low volumes and substandard profitability will be curtailed or eliminated. This is a very thorough, top to bottom review and you can expect to hear more about it in future quarterly calls.

Before turning the call over to Reynold for further comments on these operational topics, I would like to talk about the issue that we announced two weeks ago which delayed the completion of our 10Q, which we normally would have filed this morning. During the past 2.5 years we've not faced questions about the integrity of financial statements or had delays in filing financial statements, so my management team and I take this very seriously. During the second quarter we were informed by the SEC that they received an allegation from a former employee that inappropriate excessive contractual allowances had been booked at three of our California hospitals through at least fiscal year 2001. The SEC asked that we investigate the matter and report back to them. As with every investigation we face, we are taking this matter seriously, and are conducting a thorough and independent investigation. The audit committee of our board is directing a full review of the matter by their independent council and independent forensic accountants. These efforts will include testing of reserving practices at other Tenet hospitals besides the three in questions.

We've made commitments to our shareholders to maintain a posture of transparency with regard to our financials. These reviews will be conducted in a manner that is completely consistent with that commitment. It is our belief that we can put this matter behind us with no material impact to our financial position or 2004 or 2005 results of operations. However, until these reviews are complete, we can provide no assurances and its necessary to refer to today's results as preliminary. We will be happy to address any questions you have on this matter in Q&A.

And with that, let me turn the microphone over to Reynold Jennings, Tenet's Chief Operating Officer. Reynold?

Thank you, Trevor and good morning, everyone.

First, I want to drill down on our volume building efforts. Over the past three earnings calls we fully explored the importance of getting small incremental improvement in admissions from the Splitter Physician Group. Those roughly 8700 physicians who admit to more than one hospital frequently for various reasons. To get back to industry growth norms, we need to average about two more admissions per year per physician in this group. To get back to volume we lost over the past five quarters, we need to average about two more admissions from each of those splitters also.

In the fourth quarter of last year Dr. Steve Newman, the head of our California/Nebraska region stepped forward and agreed to pilot a reinvigoration of our interface with the splitter physicians. He took two steps: First to get his hospital management teams to schedule the time needed amongst numerous priorities, and second, to create a business plan competition within his 19 hospitals. With the exception of USC University Hospital and Creighton University Hospital, both academic teaching hospitals where the physicians are closed staff faculty members, Dr. Newman was able to get all of his remaining 17 community hospitals to refocus on building splitter volume. I'm happy to report that this region experienced a 3.7% growth in acute admissions in the second quarter. This is doubly a remarkable achievement since 7 of the 17 hospitals participating in the project reported no results from their splitter efforts so far, but those seven were able to stabilize their quarterly year-over-year volumes, the remaining 10 hospitals produced really outstanding growth results.

On the business plan competition pilot, Dr. Newman also piloted the data enriched decision-making process that looks for unmet patient needs in our hospital's primary service area. The fact pack concept grew out of the need to improve performance at the smaller hospitals which we first discussed at the December 2004 Investor Relations conference here in Dallas. This process also checks cost accounting and unit revenue for various clinical services with a view towards which services to advance and which once to downsize as mentioned by Trevor.

Dr. Newman's 19 hospitals also produced 24 business plan proposals from which the region management chose 6 to present. There were 4 in-patient and 2 outpatient projects. Trevor and I were so impressed with the 6 that we funded immediately the requested Cap Ex to kick start these programs off. The combined projects averaged a projected ROI of 25%.

The remain business plans' ideas will form the core of the California's regions fiscal 2006 budget for Cap Ex-request. Given the success in California with these 2 pilots, we will be formalizing plans to expand them to the other 3 regions during the month of August so we will hopefully be in full gear for fiscal 2006.

Let me be clear. The California effort was not easy. Their focus began in October of 2004, so it took two full quarters before there were visible results.

In addition to California, we were also pleased with our volumes in Philadelphia, Missouri, Tennessee, Georgia, and New Orleans. We still have work to do in the Carolinas, Florida and Texas on volume growth. All of our underperforming hospitals are in various stages of strategy development and implementation. We just don't know what the pacing will be at this point. We are pleased with the growth in emergency room visits as well as the stabilization of our surgery volumes, but just as I stated last quarter, I'll be a lot more confident when various benchmarks are positive for at least three consecutive quarters.

Turning to pricing, our new centralized managed care negotiating team has done a tremendous job improving base rates, lowering stoploss, establishing professional relationships with the large payers and improving contract safeguards. The net yield improvement that Trevor talked about is directly tied to getting the splitter admission volume up. If we take the managed care pricing we have today and run that against the commercial volume we had a year ago, we would have generated an incremental $60 to $70 million in analyzed revenue, most of which would have gone to the EBITDA growth line.

Our managed care team has other improvements underway, including a multi-year data enhancement project that will create a state-of-the-art analytical tool. Among other things this tool will give us the ability to do a breakdown of revenue by payer at each hospital and even each product line.

Another project is the work our team is doing with major managed care providers to get additional Tenet hospitals certified as centers of excellence or star performers. This is a collaborative effort which we expect will lead to improved volume growth going forward. In that regard, we've already conducted a thorough analysis of the cardiology, orthopedics and oncology standards by the top five managed care payers and I'm proud that many of our Tenet hospitals compared very favorably against the composite best standards of care. As a result we've recently filed 25 applications for designation as a local center of excellence in cardiac care with one of the major national payers. We expect to continue to continue this effort with other key payers in the month ahead. I expect to have tangible progress to report to you in future quarters.

To summarize our pricing progress, we recontracted approximately $640 million in managed care revenues in the second quarter. A very normal seasonal slowdown relative to the 1.5 billion recontracted in the first quarter. This recontracting with managed care mayors continues to achieve our objectives of mid to single high digit pricing increases.

Now I want to make a few comments on cost efficiency. In the aggregate, I'm very pleased with our results. I'm also very happy with the willingness of our hospital management teams to make the tough decisions necessary to produce this type of result.

These savings come from multiple sources but I want to highlight the progress which has been achieved in supplying control costs. Since this program was launched in early 2004, we have achieved savings of more than $80 million and we expect to capture an additional $45 million in the last two quarters of this year. Our savings come from tough negotiations and then enhanced compliance in buying contracted products or using less costly supplies and pharmaceuticals where equivalent options are available.

Finally I want to spend a few minutes talking about supportive actions we are taking to enhance and retain our volume growth. In that regard, I want to talk to you about our ongoing investments in our hospitals. This is key to maintaining our competitive positions in our markets and implementing Tenet's commitment to quality programming. Tenet's roughly 500 million budget for Cap Ex in 2005 has allocated about 20% towards expansion of our physical plant or infrastructure. Another 40% of the budget of investments are almost exclusively focused on enhancing the patient experience, improving quality outcomes and providing our physicians with the tools and environment they require to maximize their productivity.

Beginning in February of 2004, we launched a planning program which resulted in the first ever comprehensive five-year capital plans for each of our 69 hospitals. These plans detailed our proposed investments in each hospital through the end of 2009. We identified specific needs not only to support clinical services, but also for information systems and patient safety. The competitive physicians and operational challenges of every one of our 69 hospitals were analyzed and an investment plan proposed by each hospital management team to optimize the performance of that hospital. While we were pleased with the work product, we're going to revisit the plan during our budget development for 2006 this fall, to make sure the five-year capital plan is as complete as possible with what we know today. We're very structured in our approach and we know where we're going.

Let me touch on just three themes characterizing our Cap Ex objectives. First, support for our commitment of quality program, second, the delegation of investment decisions to the front line managers in our hospitals and, third, the use of contract compliance and bulk buying to get maximum bang for the buck from our investment dollars. Under the direction of our Chief Medical Officer, Dr. Jennifer daily, we identified $38 million in investments required for the first baseline phase of commitment to quality. These items were mandatory for the affected hospitals. These investments were not up for debate. The dollars were budgeted to each of the targeted hospitals, and these investments are being made.

While this piece of our capital program was dictated from the top down, we simultaneously expanded the discretionary piece of our Cap Ex program, by delegating greater authority directly into the hands of our hospital management teams. In late 2004 we simplified and streamlined the Cap Ex process by allocating a defined portion of each hospitals Cap Ex budget to the discretion of that hospital's CEO. This amounted to about 12% of our total Cap Ex budget. This improvement has been well received by our physicians, and our front line managers.

At the same time we are decentralizing the decision-making for our smaller Cap Ex investments we are also using our size to execute bulk buys across the portfolio. We've always profited from bulk buying, but we were doing it within an one year horizon versus our better leveraged five-year needs. A good example of this is our recent purchase of 12 CT scanners in a single contract where we achieved a very favorable price.

After visiting all of our core hospitals I'm of the belief that most of our hospitals are fully competitive in their respective markets. This doesn't mean that they are all positioned as I want them to be a few years out, but it does mean we are sufficient for now in terms of our overall capabilities in any market.

With that, I'll turn the floor over to Bob Shapard for a drill-down on the quarter's results. Bob?

Thank you, Reynold and good morning everyone. I would like to speak briefly today about results for the quarter and then update you on our cash position and liquidity.

As you saw in our release, we reported a net loss of $21 million or $0.04 per share for the second quarter, in the second quarter of 2004 we reported a net loss of $426 million or $0.91 per share. Now, that was a quarter which included a charge of $196 million reflecting a change in how the company estimated the net realizable value of self-pay accounts.

We've sold a number of hospitals and in the process of selling the has five identified for sale we incurred losses in the second quarter associated with these hospitals. Excluding these losses our net loss from continuing operations in the second quarter was $3 million or essentially break even on a per share basis. The second quarter of '04 we had a net loss from continuing operations of $170 million or about $0.36 per share.

Now as you're aware Tenet initiated its compact with the insured in the second quarter of last year and continues to roll out that program across our hospitals. Adjusted for the compact, revenues are up 1.3% for the second quarter compared to last year. This revenue variance is driven primarily by slightly lower volumes and the positive pricing movement, as Trevor has discussed.

Same hospital controllable operating expenses were essentially flat in the quarter relative to last year's second quarter. Given the continuing acceleration of medical expenses, this is a strong indication that our cost efficiency programs are having a positive effect.

Now, since a lot of items will impact this year over year comparison of operating expense, let me draw your attention to some of the bigger items. First, we did lose volumes, but on an equivalent per patient day basis, controllable operating expenses were less than 1.5%, excuse me, were up less than .5 %, still an impressive performance.

Second, we had a $42 million drop in malpractice expense. Last year's malpractice expense was abnormally high driven by two items, an increased reserve taken in the second quarter of last year to reflect adverse losses, and an adjustment to the malpractice reserve as a catch-up adjustment as we changed to a shorter maturity rate to reflect changes in payment patterns. This high level of malpractice expense was partially offset by a $16 million gain on asset sales last year.

If we back out the net of these two items or $26 million we still restrained growth in controllable operating expenses to .8% or 1.9% on a per equivalent patient day. So even making conservative adjustments for unusual items and volume declines, it shows we had a minimal expense growth, strong performance relative to medical inflation rates.

Provision for doubtful accounts is down because of the compact, as I mentioned, and because of the $196 million adjustment last year which increased expense again when the company modified its estimation process providing down self-pay accounts. This is partially offset by the positive adjustment of 34 million this year, as $34 million of doubtful account reserves were re classified to contractual allowances as part of a settlement of disputed amounts. This had no earnings impact by the way.

Normalizing for all of these items, the provision is up $9 million versus last year, or at about 12.5% of adjusted net operating revenue. This is probably the most reasonable comparison to the 12.3% which we reported last year, and to the approximate 12% we reported in the first quarter of this year. So this increase in bad debt levels is the result of the number of uninsured admissions increasing by 6.5% this year, on a same hospital basis that increase is actually 5.4%.

Note also, our compact discounts in the quarter were $146 million, a slight decline from the first quarter levels which included some reclassifications. The compact will be implemented -- implemented in Texas beginning in September this year. Which completed our implementation of the program. By the fourth quarter we expect Texas to add approximately $60 million per quarter to the discounts under the compact.

Net interest expense in the second quarter of '05 is up approximately $16 million due to the additional debt raised since last year, partially offset by the interest income earned in undeployed cash. Remember -- remember the company did elect early adoption of the FASB standard for introducing stock compensation. The company has stock compensation expense of $13 million on a pretax basis or $0.02 per share in the second quarter of '05.

A number of items impacted results from continuing operations in the quarter that we do not consider recurring in nature. One, we incurred $11 million of charges for litigation and investigations. Secondly, we recorded a negative adjustment to earnings of approximately $10 million as a result of an adjustment of deferred tax valuation allowance and, third, we had a positive non-cash adjustment it reduce our tax accrual for audit years '95 to '97. This adjustment was $23 million. The net impact of these increased earnings by $0.02 per share during the period.

We're pleased with the progress of the second quarter. While we expect to see some benefits in '05 from our cost pricing and volume initiatives, the more significant impact will begin to be seen in 2006. As a result, we're not changing our outlook for 2005 results. It should also be noted that litigation and investigation costs included an accrual for a $45 million estimated minimum liability attributable to our securities class action lawsuit and two shareholder derivative actions, which has been offset by corresponding amount that's expected to be recovered from our insurance carriers and our incurrence programs.

Now let me briefly address the step toward our returning to a reasonable and sustainable level of profitability and operating margins. The key component to our recovery is volume growth. Our goal is to not only achieve the volume growth of our peers, but to regain volumes lost during recent periods. Regaining lost volumes, if achieved, will take time and will first require us to resolve some of the litigation and uncertainties we're currently dealing with.

With regard to pricing, we spent 2003 and part of 2004 making concessions on pricing. We're now vigorously negotiating full and fair price increases with all of our managed care payers. Managed care contracts representing over $2 billion of our managed care revenue have already been renegotiated in 2005 with pricing gains of mid-to high single digits and we expect to renegotiate an additional billion-and-a-half before the beginning of the year. These gains are being offset by shifts in business mix. More managed government programs and less commercial managed care and payer consolidation. But the pricing gains we're experiencing taught will stay with us as the mix shift slows.

We've made progress on the cost structure initiatives. But we must continue to work to align our cost structure to our level of volumes and revenues. We will continue taking steps to reduce operating costs this year and next year that, when the full effect is reflected in earnings, should help to return us to margin levels reflective of our sustainable margins. While volume growth is the key to our long term earnings growth cost structure and reasonable price increases are the keys to restoring our operating margins and profitability.

Operationally the second quarter provided cash of $24 million after capital expenditures of $127 million. The result of all of this is an unrestricted cash balance of $1.6 billion at June 30, with an additional 260 million of cash restricted as support for a LC facility. Tenet has no bank lending facilities currently in place.

In summary, financially we're making progress but need to stay focused from a liquidity perspective we have balance sheet flexibility allowing us time to improve operations without inhibiting our ability to fund all operating and capitol needs.

We're now ready to move to Q&A. We want to try to limit this call to a hour as all of you have busy schedules, so let's get started. Operator, I'll turn it over to you.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is coming from Glen Santangelo of Credit Suisse first Boston. Please go ahead.

Oh, yes, thanks, I just had a quick question on the volume. It seems for a couple of quarters now the Company has experienced some pretty decent erosion in the managed care volumes, away from your commercial business and obviously more to the managed Medicare and Medicaid business which is growing much faster. Could you just give us a little bit more color to explain, you know, this erosion in the business mix and, you know, to help us better assess for when it may reverse course? Thanks.

Okay, sure. This is Reynold. I think we've been pretty consistent in the last couple of calls in tying a couple of dots together. First of all, on the Medicaid, managed Medicaid and managed Medicare business, those -- those individuals are less mobile than the commercial managed care. So if you look at the factors that we've laid out, the numerous tractors which would be causing splitter doctors to hedge their bets right now at hospitals down the street, we believe the group of patients that they can more easily elect to carry with them are the commercial managed care patients. So I think, again, we've not seen anything to dissuade us that that is exactly what is happening. And to the extent that there is growth in managed Medicare and managed Medicaid, as you are well aware of, there are numerous insurance companies now re-entering those particular product lines throughout the United States and so we see that growth, not as any specific marketing effort but a natural progression of the enrollment in those particular product lines starting to grow gradually.

Reynold, thanks for the comments, but the one follow-up I had was you said that the volumes were particularly weak within Florida, Texas and the Carolinas, could you just give us a sense of what is actually going on in those markets? Is it more your physician relationships? Or is it you know you need to put some of these pilot programs in place? You think there is additional Cap Ex needed? What do you think is going to correct the problem within those markets.

Sure it is a good question and I'll be glad to give you a flavor of those. Let's -- let's go first to Florida when we mentioned in the last two earnings calls that in our tough managed care negotiations that, you know, we've had to walk away from some smaller insurance companies in which we felt like the rates that they were proposing were actually money-losers for us, those three or four are actually in Florida. And so we electively decided not to re-engage in those for the right reasons.

Secondly from all of the newspaper articles, hopefully most of you are aware that the battle for doctors wanting to be paid for ER call has been a hot focus in the state of Florida, not only for us but for everyone else. We've approached that very cautiously and we do believe in the last month or so a sense of order is beginning to bring itself to the national debate, as well as to the state of Florida and so we're already moving with our solution to that, and that was affecting about five of our hospitals where that -- that tension existed.

Thirdly, the South Broward hospital district, which is a very large not for profit in Broward County, opened up the Miramar Hospital, which is halfway between our Palmetto, Hialeah and Cleveland Clinic hospitals and so that was a short-term hit to us. And on that particular one, we're very confident that the population growth around our hospitals are very strong for the future. But when that new hospital opened it was a detriment to those three hospitals on a loss of volume, I believe somewhere in about the 15% range for those three hospitals.

We've also highlighted -- highlighted the two years that as far as entrepreneurial competition it is not as much the specialty hospitals and the whole hospital joint ventures in Florida, as it is the physician outpatient surgery centers and entrepreneurial diagnostic centers that were attacking the outpatient volume down there.

And the last thing that would I like to say about Florida, which is a real positive, is that Florida is our truly integrated managed care market and Florida has been a tremendous help to our 23 cities in the United States in getting these mid to high single indigenous it increases. Because of that, they do not always get the revenue increases that they could have gotten in a timely fashion, but they have been good team players and so there's a lot of our net revenue improvement that the Florida team gets credit for for being tough, standing with us and helping us get what the company needs as a whole. And -- and again, that uncertainty that we've talked about is -- is a negative effect to certain doctors, as Trevor said, who may move down the street until they know whether we're really going to sign a contract with a major insurance carrier or not.

Moving on to Texas, the issue in Texas, which is Houston, Dallas, and New Orleans, is really the immense competition over the last two years by specialty hospitals, and joint venture outpatient centers. You know, we've been doing a lot of work on what our answer to that is. And the old saying goes sometimes you need to fight fire with fire. Given the national debate, which has been uncertain about, you know, Congress' involvement and what they're going to sanction or not sanction within those particular things, we've walked very cautiously while we continue to do all the fundamentals of physician visitations, splitters, interface and those kind of issues, our commitment to quality program. So we think that that national debate is hopefully starting to take a focus within the next quarter and we'll make our final decisions about exactly how we're going to unfold a strategy to fight with that.

In both Florida and Texas, I would like to say that When we mentioned our CEO hospital turnover, over the last six quarters we've had more turnover in those two particular states, so I think we've been very consistent in indicating that our discussion with doctors indicates it's at least a 12 to 18 month period of time before the medical staff and especially splitter doctors feel comfortable with the new CEO and the new management team, and one of the things we've done here in Dallas is, under the leadership of Joe Bosch, our new head of HR, we've put together a new orientation program so every new manager to a hospital gets to that within a reasonable period of time. Learns about the company. Learns about our way of doing business, our major -- major strategy focus and so we think that's going to help up the learning curve, but that program just got started about two months ago. So we think we'll get a lot from that.

With that, the Carolinas, the only thing that I will say about the Carolinas is that those are very successful hospitals and we've filed three CON's for expansion capacity in three of those locations, and it is very important for us to stay on that track. Which usually takes one to two years to win the CON, to enhance the capacity that we need for the future. We have tremendous population growth going on around those hospitals and we need this to continue taking advantage of that population growth.

Thank you so much. Appreciate the detailed answer.

Yes, sir.

Thank you. Your next question is coming from Darren Lehrich of Deutsche Banc. Please go ahead.

Thanks. I just want to follow through a little bit more on the Cap Ex question. You know, obviously you're going through a planning process here. And I -- I just want to get a better sense for, you know, directioning where you think Cap Ex is going, is 500 going to 600 million in '06? Just give us a feel for where you think this whole process is -- is going to take us on that. And just one quick question as well with regard to employing physicians, you know, the Company went through a major process in the '90s and early 2000s to get away from that the we've seen that other revenue line pretty stable, but I just want to understand if you are back out there recruiting physicians more aggressively now given the -- the splitter admission issue that you've talked about.

Darren, this is Bob, I'll turn the second half back over to Reynold. On the Cap Ex, you know, our original estimate was roughly $500 million last year. We're pretty comfortable with that number. But as Reynold mentioned, we're looking at a number of opportunities where we can expand hospitals and expand our business. If we get those opportunities, we're -- we're more than willing to step up at that capital spend. We've got the liquidity and the cash and the capital to do that. On our base plan, 500 million is -- is still the plan. If we get some opportunities to expand it that we think will be good for the business, we'll step that number up.

Okay.

Darren, on the employee physician question, yes, four, five years ago we did move down to where the only employee doctors we have are the faculty at certain academic medical centers, urgent care centers in which that's the only way you can get physician manpower to cover those, and -- and to an extent in a small number of cases where states had a malpractice crisis like Mississippi, and you could not get a neural surgeon to cover ER call, we went into a short-term one-year arrangement and -- and then the doctor went into private practice after that. We're watching what's happening. There appears to be, you know, an interest in that. We still have some not for profit hospitals we compete with who still employ well over 200 physicians. But, again, given the -- the history of the past, we're very guarded about that. And -- and other than those they particular examples I gave to where we need to fill legitimate clinical quality holes where we do not have a private doctor to do that, we do that on a short-term basis.

Thanks very much.

Thank you. Your next question is coming from AJ Rice of Merrill Lynch. Please go ahead.

Thanks, hello, everybody. Just to follow up from your prepared remarks, with the rebound in admissions that you are seeing in the core California facilities, obviously I guess what we're all hoping to see is that over time the -- that would translate into some improved profitability. Could you comment at least relatively speaking? Maybe the aggregate EBITDA margin is masking what's been an improvement in California, perhaps in the expense of Texas and Florida?

I think you have seen a rebound in the California market. In terms of overall profitable, what we've been able to do is offset what has been slow volumes with -- with -- with performance on the -- on the cost side. So we've been able to achieve what we've done this year despite the weak volumes because we've been successful with our cost initiatives. We're obviously counting in the long run on getting the volumes back up and continuing to see success in the cost iniatives as well.

But if you get a 3.7% increase in California, does that, I mean, does that immediately translate into California being significantly more profitable or is that something that takes several quarters before that translates , I guess I'm just trying to understand how the dynamics will likely work.

Yes, AJ, this is Reynold. Directionally speaking the margin of California did improve with a 3.7% volume. Again, as you know, we don't break those things down and get down to details on it. But -- but in that particular state, yes, there was an impact on that in the quarter. And if you go back to my statement at the investor conference, again, where we were gravely concerned about the number of small urban hospitals that we had, 40% of which were in California, we were very pleased that not only from the volume standpoint but the incremental improvement in margins was seen in California.

Okay. Maybe I just -- if I could quickly run my follow-up would be on the tax question, I know last year with the asset sale program there was a comment that you expected to get, I think, some tax proceeds in, in the second quarter, at least that's what it was a while back and I haven't heard you guys talk about that. Was there anything in the cash flow numbers that relates to the asset sale program and realizing some tax benefits, or is that not a factor this quarter?

The last year of the tax benefits were in the $537 million refund that came in the quarter.

Okay.

The quarter was pretty normal from a cash standpoint.

Okay, good. Thanks.

Thank you. Your next question is coming from Adam Feinstein from Lehman Brothers, please go ahead.

Thank you, thank you, good morning everyone. I have two -- two questions here, one it was very helpful breaking out the volume growth in the California market. I was curious whether could you tell us, give us some numbers in terms of Florida. You said it was weak, but just trying to get a sense of how bad things were from a volume standpoint. And then, secondly you compared the managed care rates to the Medicare managed care and the Medicaid managed care, I would be curious to know in terms of your regular Medicare patients in terms of the reimbursement what the difference is for a Medicare managed care patient. It would seem to me that that would be the more relevant area to look at in terms of this mix shift. Thank you.

In response to the first question, over the last six quarters we gave a lot of answers to questions that were specific to markets in an order to let everyone know we're doing our homework, we know what's going on and our strategies make sense. That actually served an as detriment to us because our competitors would use that information when we would signal a sign of weakness by an individual hospital or a city to cause further confusion on the issues that we're still fighting with, so from this point on we're not going to break down those particular areas and go into any detail on those because we want to give each hospital in each city a level playing field and a fair chance to improve themselves against the competitors. On the second question, Bob Yonk, who heads up the managerial division, Bob, could you answer the question about the difference between Medicare and managed Medicare.

Basically we tie the reimbursement to the Medicare rate. We try to get slightly higher than the standard Medicare government rate from the managed care payers. The -- the bigger issue from our perspective is that from a managed Medicare basis, that managed Medicare is a percentage of our managed commercial yield. And about 60%.

I see. Okay. And then just, you know, in terms of the -- the pricing, you guys, you know, talking about seeing the mid to high single digits, you know, clearly a lot of moving parts here. When do you think we'll start to see your underlying revenue per case start to grow within that -- that forecasted range? Do you think we'll see that before the end of 2005 or will some of the adjustments we keep seeing keep -- keep that number at -- at the low levels? Thank you.

Yes, sir. The -- the current rate structure that we've negotiated has set the vertebrae for building those strong with high single digit rates on a go-forward basis. The actual rates are actually developed on who actually shows up the hospital, what hospital mix we have, what payer shift implications and whatever charge master strategies come into play, 75% of our revenue is negotiated, 25% is tied to our charged master strategies. But the vertebrae is in place for that growth.

And let me finish up on -- on the comment again, the -- the major impact item is us winning back the splitter doctors who will bring with them the commercial insurance component which not only has a higher net revenue and a higher margin but it has a drag of -- of outpatient volume much greater than Medicaid and Medicare also.

Thank you. Your next question is coming from Joseph Chiarelli of Oppenheimer.

Thank you. I would like to connect some of the dots, if we could. You've seen the impact of the splitter efforts in California bear fruit. You've mentioned that that's being rolled out to other markets, I think you mentioned for either August or September for some, it sounds like meetings, in the past you spoke about how you were taking that pilot program and working it through other markets. You also mentioned the challenges in Texas with regard to outpatient centers, and JV issues, specialty hospitals in Texas. How long does it take if you will, and I realize this is a range too, for you to get comfortable that this is all going in the right direction and -- and where it -- it would start showing up, let's say, in financial results? Thanks.

It's Trevor. You know, I think all of these things, if you look at them, and I'm glad that you phrased it the way that you did in terms of connecting the dots. We've tried a number of different initiatives. Some things that are clearly effective, we roll out immediately to all hospitals. Other things that -- such as some of the volume building initiatives that Reynold is doing, we pilot in a region or in a market where we expect it to have success, and then we refine it before we roll it out.

So when -- when you look at -- when you ask the question about how many quarters, how long does it take, going back to my comments, the overall comment about the -- the quarter, we continue to make progress. We've laid a strong foundation. Those -- those are things that I'm saying because, in fact, that's exactly what we're doing the way we look at it, we're laying a foundation, we're implementing initiatives that are taking effect.

And it just depends on what you're talking about, whether it is a cost initiative where we have very direct control and we can have in fact within a quarter or two or a volume initiative that may take two or three quarters, it's hard to be more precise than that. But that's why we're trying to direct you to some of the underlying statistics on pricing and costs to demonstrate that what -- whatever benchmark, you want to use, whether it is our own performance or whether it is others in the industry, these actions are being effective.

This volume challenge remains the greatest challenge, and it is also one that is difficult to bring a very analytical approach to bear. When people don't show up in your hospitals, it is hard to know with precision why they did not show up, one year compared to the last. But I think we have a very good handle on it. And I think that the -- that these particular efforts that we're making, whether they are relationship-based or they are contracting based, or they are the result of examining service lines or targeting Cap Ex, they are all taking -- having some impact on the problem in various different ways.

Thanks.

Thank you. Your next question is coming from Sheryl Skolnick of Fulcrum Global Partners, please go ahead.

Thank you, good morning. I actually have two questions that are somewhat unrelated. You noted that in the bad debt reserve -- bad debt expense, you had a reversal of a $34 million reserve, and I think to offset that revenue was reduced by 30 million to account for contractual allowances. I'm very curious how that arose and also, whether, if you make those adjustments and get to a 7.6% or so bad debt expense level whether or not that is in fact a better number to use rather than the 6 and change percent that was actually reported in the quarter from continuing operations. And then I have another question.

Okay, yes. What -- what happens is when we settle these disputes with the payers, what we essentially do is agree to reclassify what had originally been accounted for as an uncollectible to a contractual allowance, simply a reclassification that doesn't have any effect on earnings, it is just a concession on our part that it's a contractual allowance and not revenues for an uncollected. And we tried to -- I tried to, in my remarks, restate the uncollectibles adjusting that out, and that's when I came back to a -- a restated bad debt of 12.5% of revenue for the period, trying to wash all that out.

Was that plus the discount amount?

That's right. Put back in.

You compact -- I adjust for the one-time item last year, 196 million and you wash out the 34 million of this year, the net of all of that uncollectibles is up $9 million to about 12.5% of -- of adjustment operating.

Right. I got that part, thank you. And that was helpful. And what I'm getting at is, when you -- since it's not -- since I believe you said that you've addressed most of the outstanding issues, historic issues with payers, you've kind of wiped the slate clean, you're going forward and I might add truly making some impressive friends out there which is great among the payers, getting good compliments from some good payers out there, but would the 7.6% ratio that I get by adding 30 million back to the top line and roughly the 34 million or so back to the bad debt expense be a better number for modeling the company going forward?

I think that's reasonable.

Okay. Great. That's what I want to know. Now, one thing we've not touched on was the -- August 1st was D-day for the final rule for hospital reimbursement for Medicare for fiscal year '06. There was a change in that, in the transfer versus discharge, so now it is 182 DRG's, up from 30, as opposed to 223, up from 30, could you comment on the impact of that that you expect on your business, whether it -- this is something that, you know, we need to be concerned about, whether it might increase your length of stay so that you achieve the average and therefore decrease Medicare margins? Or -- and -- and whether or not the rather attractive increase in the market basket update for traditional Medicare is enough to offset that given your patient mix?

Sheryl, this is Reynold, first of all, when -- when Medicare makes decisions about what they're going to do between October and September the following year, we just start analyzing that. But a lot of that goes into our budget determinations that we do from September through December. With the federal government, there are a lot of moving parts, including the 75% rule debate and those other -- other kind of issues, and so again as far as, you know, our posture, you know, we don't see anything there that affects the strategies that we're unfolding and the reason we're going about doing those, and just see that as a normal consequence of, you know, pluses and minuses that happen with Medicare, Medicaid, commercial carriers, et cetera, et cetera, from that standpoint.

So at this point you don't have an answer for me?

That's correct.

You are looking for, like, specific analysis as to what the impact is?

Well, I'm trying to get a sense of whether or not, you know, this -- the transfer versus discharge move is something that we need to be concerned about, going forward, or not. I mean, is -- is this, you know, something that we need to -- that given your case mix and given where your hospitals are, is something that's going to be one more blockade for Tenet to have to surmount?

Well, unfortunately, we're not singled out.

Right.

But I would say on the concerned list I would put the transfer discharge rules and put the, you know, further refinement of DRG's, the -- the rehab rules, the -- on the lucky break column, it appears that the market basket update is more favorable than we had expected. So, I mean, you -- you know from years of analyzing this business, as well as anyone, that sometimes you have things that work in your favor and sometimes you don't. I would say that those -- certain of those structural regulatory concepts that I've -- I'm -- I've mentioned are causes for concern, that we don't see -- a lot of upside in those. On the other hand, there don't seem to be much interest among the regulators in -- in clamping down severely or causing some negative shock to hospital payment rates.

Okay. Thank you.

Thank you. Your next question is coming from Kemp Dolliver of SG Cowen. Please go ahead.

Hi, thanks. You all talked about the service line analysis before. Could you give us a little more color with regard to the timetable for roll-out, you know, where you are going to start, how quickly this is going to move through the system, and, you know, how this interplays with some of the -- you know, the five-year plans you had discussed before?

Kemp, I did not recognize one word you said when you started out. Which specific item are you talking about.

I'm talking about the service line analysis.

Okay, sure. Yeah, on -- on -- as far as that -- that goes, we -- we again are piloting that in California as a part of what we call the data enriched fact packed determination, and we have completed 12 of those hospitals there. We've also done another four or five out in the other regions. And, again, we're currently determining, you know, how we can, you know, realign some of our existing resources to move that process along as expeditiously as we can. Again, like everything that we're doing, we -- we want to do it right. And so whatever the pacing needs to be to do it right, that's -- that's what we're going to do. So while we're happy about early results, you know, there's a lot of resources that have to be amalgamated and scheduled to make this -- this flow correctly.

The other thing I'd like to say is that on all of these things that we're talking about, you know, we've been doing components of those as we started reporting in the middle of 2004, at individual hospitals or other -- other type of things. So in many cases when you talk about pacing, it is a matter of either doing the individual hospital pilots or a regional pilot, checking your results of what you -- what you get and then seeing what components of that either applies or does not apply to other cities or -- or other regions. So, you know from a methodical standpoint, I -- I would just say that, you know, directionally speaking, you know, we would like to make sure that we get through all hospitals, you know, by this time next year, if we can beat that process, we'll figure out how to beat it.

That's great. And on the pilots, just what's been the quick, you know, impact? Is it, you know, noticeable reduction in services? Just any color you have on that.

Yeah. I -- I think, again, the great thing about the pilots is that , again, with a number of new hospital CEO's and other managers at the hospital, you know, they were getting pushed and pulled by various opinions by various doctors and others about where they should concentrate their efforts, and the great thing about this is that, again, it makes them look within that roughly ten- mile circle that circles their hospital to find out what demand is already there, that someone else down the street is doing a better job than you are. So in that particular regard it take as whole lot less Cap Ex, it takes a whole lot less market design and those type of things to begin to immediately start looking in that direction.

It also on the other side of the lower performing product lines, it is -- is an immediate eye-opener, and so we've already made decisions that in some of these hospitals that over a couple of years we'll -- we'll actually close certain services. Now, I'm not going to identify the hospital and the service, because there is a lot of community work that needs to go into it to make sure that, you know, you have resources available, where the patients are going to go and those types of issues, and we will do that right, but we've already made those kinds of decisions and at the right time we will tee up exactly what those are.

On the other side of the coin, would I say there is more de-emphasizing of services than there is a closing of services that gets an immediate ballast to us and where to make our investments and how to improve the margins and the hospitals going through this particular exercise.

That's great, thank you.

Yes, sir.

Thank you. Your next question is coming from Elie Radinski of Citigroup. Please go ahead.

Yes, thank you very much. And also, nice quarter. When you talked about your expense and expense controls, it sounded like you were pretty satisfied with them. Yet, when you look at yourself and compare it to other corporate hospital companies, your salary, wages and benefits and your supply costs as a percent of revenues seem, you know, inordinately high, what are your thoughts about that, and what is the opportunity there for those line items?

Well, Elliott, if you look at any costs, in fact virtually any line item on the income statement for Tenet as a percent of revenues, compared to the other companies it looks bad, if you look on an unit basis and particularly if you look at growth year-over-year, I mean, I looked at, you know, 20 statistics comparing ourselves against the best benchmark companies and our cost control has been better on all of them. So, I think it's -- you know, we clearly have work to do on the overall level of -- of costs that we have this company, when it was highly profitable for a brief few years allowed its cost structure to build up in all sorts of ways, some of that we were able to take apart very quickly and others -- other parts of it take more time to do. But we think, at least in this environment that the per unit basis is the better way to look at it, and particularly when you look year-over-year at how we are controlling the growth or reducing costs on a per unit basis, we -- we compare very favorably.

Okay. When you look at physician recruitment, you are talking about having a lot of your emphasis on split admitters, can you talk about what you are doing from a brand new physician recruitment campaign in order to gain just overall an increase of physicians, and are you able to do that in light of the Alvaredo suit?

Well, you know, when we use the word "recruitment" at least in our company it means that a physician currently resides in a geographic area over 30 miles from where your current hospital is. And in that particular case we've not seen any major degradation in the interest of doctors to talk to Tenet hospitals if there is a need to be filled from that particular part. The splitter doctors is -- is what we call is re -- redirection, meaning that doctor can choose which hospital they want to go and so through the litany of interface, solving problems, telling them the good things that are going on, answering issues that they have with equipment, technology, scheduling and those kinds of issues, that we enhance their belief that they can get an experience better at a Tenet hospital than they can the hospital down the street.

And, again, that splitter issue has been impacted by the national media. But I would have to say to you in doctors I've spoken with, or when I check with my hospital management teams on the doctor who is coming from outside, 95% of them do not even know who Tenet is, has never heard of Tenet and is totally unaware of anything that is going on with any hospital company. They're just trying to find a good community to practice medicine in.

I see. Do you have a budget for that, for this physician recruitment or do you have a number of new physicians who reside greater than 30 miles who have been recruited to Tenet hospitals over the past year?

We leave the decision as to whether there is local physician manpower available or you need to try to recruit a doctor from outside to the local hospital management team and medical staff and board of directors, you know, based on the services that they have and what is going on in that particular community so we don't -- we don't track that at our level.

Okay. Thank you very much.

Thank you. Your next question is coming from Gary Taylor of Banc of America Securities. Please go ahead.

Hi, good morning. Just had a couple of quick questions. First, on the Texas insured discount, 60 million a quarter, I missed what you said, that begins 3 Q or 4 Q? Hello?

Yes.

Yes, September, we sudden should expect that to be the beginning of September.

Thought, maybe I thought my line got -- so 3 Q, so that is an incremental 60 million a quarter in discounts, right?

You'll see a full effect in the fourth quarter, a partial in the third.

Okay. And then I just wanted to make sure, we're calculating same store net revenue as about a 4.4% year-over-year decline. Do you have those statistics?

Yeah, hang on a second, Gary. Gary, do you have another question?

Yes. The other was just on California, you talk about admissions up 3.7. I'm just wondering if you could provide either in detail or just in general if adjusted admissions showed the same sort of increase or you are seeing the same sort of outpatient pressure you've seen in other markets, and also what would insured admissions look like if we looked -- if we looked at that, so just trying to get a sense of -- you know, is California really up both on an outpatient basis and are we seeing insured business the primary driver behind that 3.7?

Okay. The same person who needs to check the statistic you asked secondly is checking the first statistic, so can we move on to another question and then we'll come back on and answer those two.

Okay. That's all I had. So I'll wait. Thanks.

Thanks.

Thank you. Your next question is coming from Mike Scarangella from Merrill Lynch. Please go ahead.

Hi, guys. Just two quick ones. You took an accrual in the quarter for securities class action and shareholders suits and you also reduced your accrual for you IRS issues. Should we infer from that that you are closer to resolving any of those issues, any color around that? And then my second question was, just given some of the pressures you've mentioned some of your markets, I just want to check in on your position on any future asset sales. Thank you.

Sure. On -- on the IRS, what we simply did is, in addressing the 95 to 97 audit period, and we had disclosed that we thought that we had a potential liability up to 280 million I believe at some point in the future, that was both tax and interest. What we've done is settled some of the issues early with the IRS, at about the level we thought we would. But what we've done is save the interest. Mostly what we reversed on the tax accrual side was interest as we anticipated paying that number in the future. It will net out because we'll pay it sooner. It is simply a timing on a tax payment, not a change in the estimated amount.

In terms of the reserve we booked for the -- for the shareholder derivative suit, that's simply a function of FAS 5, and the FAS 5 for those of you who read FASB's out there, and if you do, you need to find other things to do with your life, if you read FASB's in great detail, once you believe it is probable and there is a reasonable estimatable range, you book to the minimum liability of that range and that's simply what we've done is booked to what we consider to be the minimum liability for a potential settlement on the shareholder derivative suit. We've also assumed that at that level it would be fully reimbursed under our insurance programs, there's really no impact on earnings.

And does that -- I don't admit to reading any FASB's but that was my answering, so does that imply that you have made some progress, and you're able to estimate some minimum liability?

This is Peter Urbanowicz. You know, I think part of your question too, you know, is are we doing that order to -- are we down the road on settlement, or something like that. You know, as the -- as this case goes along, we're set for trial in May of next year, we just continued to update the status of where we are on these suits and re-evaluate them, and that's really part of the process that we were engaged in.

Okay. And any -- any comments on my asset sale question?

What was your asset sale question?

I was just saying, just wanted to check in on your position, whether any future asset sales would be in the works, especially given some pressures in some markets that you mentioned?

There are five hospitals remaining on our list of identified and we're actively working those five.

You're okay with the portfolio as it stands, it sounds like.

Yes.

Okay. Thank you.

And the same story revenues Gary Taylor quoted negative 4.4% is correct.

On the adjusted admissions questions it is up in California and the percentage of insured is greater than the percentage of uninsured within that category.

Thank you. Your next question is coming from Miles Highsmith of Wachovia Securities. Please go ahead.

Hey, guys. Just a number of questions first, can you give us the allowance for doubtful accounts at the end of the period, Then secondly I think in the past you have disclosed some information related to in-patient rehab and compliance and things, at the 50% level. Wondering if could you give us that, at the 60% threshold, your thoughts there, or just a -- any general comments along those lines.

Okay. On the first one, on the rehab rule, again our estimated, you know, impact of that is about $13 to $15 million as we phase through that this year. And, again, the debate that's going on about freezing it for a couple of years at 50%, you know, your -- your fiscal intermediary has to agree to do that also, there are two different moving parts. So we're just moving on with our plans as if the rule is going to go in the way that the rule went in, and that is the best most conservative way to do that, and so we know that we have about 13 or 15 million to make up somewhere at the operating margin line.

Okay. Great. And is that for the -- the rate year, for this -- for this calendar year?

It's on an annual run basis.

Okay.

And I think your question, what our balance sheet balance for the -- for the doubtful accounts is $642 million.

Great, thanks, guys.

Thank you. Your next question is coming from Tim Lehigh of Goldman Sachs.

Thanks. Just one quick question, and it was alluded to a little by the earlier, but the operating cash flow in the quarter of about $150 million, is that the rate, run rate to think about the business? And then relative to obviously the $500 million in Cap Ex? And then my other question is relative to that going forward, what is going to be the bigger driver of changes in cash flow? Is it going to be just improvements, or declines in profitability? Is there are something on the working capital side that could lead to big swing factors? Thanks.

The improvement is going to be in the operations, there are no other big swings. And in terms of the quarter, it was a fairly normal quarter for us. Having said that it is hard to pick Q2 as a run rate. First quarter is usually going to be a stronger quarter for us than the second, and the timing of certain things, interest payments do not fall evenly throughout the year, it is hard to call Q2 a run rate but it was a normal period for us.

I -- I think you could -- you could get from our projections of -- our outlook for this year at that we were expecting cash flows this year to be negative by $100-$200 million. You could probably assume right now we're slightly ahead of that plan, but we have no reason to change our outlook for the year. But in -- in terms of the quarter, again, it was -- it was a fairly normal corner.

And I guess beyond that relative to operating cash flow, in future periods is there any reason why your operating cash flow shouldn't closely follow your net income and your not -- just your non-cash expenses.

No, it should not. There is no reason it shouldn't.

Okay. Thank you.

Thank you. At this time there are no further questions.

Thank you, operator.

Gentlemen, do you have any closing remarks? Thank you, that does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.